City of Chicago FY2021 Proposed Budget: Analysis and Recommendations

November 13, 2020

Click here to read the full report.
Click here to read the press release for this analysis.

EXECUTIVE SUMMARY

The emergence of COVID-19 as a pandemic in early 2020 created a once-in-a-century and unprecedented challenge for states and cities across the country as economic activity was substantially limited due to public health concerns. The Federation recognizes that Mayor Lightfoot and her administration—like mayors across the country—had limited time and options to address an unforeseen and dramatic decline in revenues. All cities are in a difficult financial situation, which is compounded by uncertainty surrounding the longer-term impacts of the pandemic on the economy and how people live and work.

While the City of Chicago is not at fault for the impact of the pandemic on its budget and economy, it did start out in a more precarious situation than some of its peers, having begun FY2020 with a historic $838 million Corporate Fund budget gap. The City closed it through a number of savings and efficiencies, targeted tax increases and refinancing of debt for near-term budgetary relief. However, due to the dramatic decline in revenues caused by the pandemic and the failure of the federal government thus far to provide revenue relief to states and local governments, the City of Chicago faces a year end shortfall of approximately $799 million in FY2020 and a budget shortfall of $1.2 billion in FY2021, which could worsen if the pandemic does not subside.

The Civic Federation offers our qualified support for Mayor Lightfoot’s proposed FY2021 local funds budget of $9.8 billion. It is reasonable within the context of the extreme uncertainty surrounding the pandemic crisis, which has severely limited the City’s options. The Federation supports Mayor Lightfoot’s goals of attempting to balance the City’s short-term financial needs without overburdening an already fragile economy. Our support is qualified because the Federation cannot independently verify the City’s contention that the extraordinarily large debt restructuring it will rely on to close its FY2020 and FY2021 deficits is sustainable. Details have not been finalized or made public to show that there will be net present value savings on the transaction. Taxpayers would be better served if the City shared scenario plans and additional details associated with the proposed scoop-and-toss debt refinancing. Members of the City Council are well positioned to request such data and should do so if additional detail has not been presented before the budget vote.

The Federation is extremely concerned about the future impact of the City’s potential reliance on both large upfront savings from another round of debt transactions and other non-recurring revenues to close budgetary gaps. Such actions, while understandable as the City attempts to maintain services during a punishing economic recession, will increase the probability that the City will have to resort to drastic cuts in essential city services, revenue increases, or both, when it faces an enormous projected shortfall next year. The Civic Federation strongly supports federal revenue relief funding to states and local governments to help them address their pandemic-caused revenue shortfalls. However, additional federal funding will not close the City’s pre-existing structural deficit. The need for lasting structural reforms to city operations is of the utmost importance in order for the City to be financially resilient moving forward.

The City is proposing to close a large portion of the FY2020 year-end deficit and FY2021 budget gap by refinancing and restructuring approximately $1.7 billion of general obligation and Sales Tax Securitization Corporation debt for $950 million in near-term budgetary relief and $750 million in economic savings. However, these enormous transactions come with risks. While interest rates are at historic lows and it is financially prudent to refinance debt for economic savings, the debt restructuring that is being proposed has a structure that extends the maturity date of the debt and increases debt costs in future years. The City does not have a lot of good options, but it is important to note that scoop-and-toss bond financing is not good policy. The City says it may not move forward with restructuring a portion of the debt if federal aid is provided, but it will still face increasingly daunting debt and pension obligations going forward.

In addition to the proposed debt restructuring that that will generate a combined $950 million in non-recurring budgetary savings for FY2020 and FY2021, the FY2021 budget also relies on a number of other non-recurring revenues. These one-time measures include $30 million in rainy-day funds, $74.1 million in tax increment financing surplus, $59 million from sweeping aging revenue accounts, as well as smaller amounts from the sale of land. The Federation does not oppose the use of rainy-day funds during times of extreme budgetary stress such as this and is encouraged by the City’s restraint in not relying more heavily on reserves—particularly long-term asset lease reserves—to close the budget gap. A larger use of reserves would likely negatively impact the City’s credit rating. And while the City has annually declared a TIF surplus, making it akin to a recurring revenue source, the available funding in TIF districts is not unlimited and should not be relied on in future years to close budget shortfalls. Using one-time resources for recurring expenditures is not an ideal practice and will cause budget difficulties in future years.

The Mayor’s budget proposal also includes a moderate property tax increase of $94 million, which includes $16 million by taxing new property, $35.4 million from an increase based on the consumer price index[1] and $42.5 million to account for the loss of collections on property taxes for pension contributions. This broad-based and partially indexed tax increase can be justified given the growing financial obligations facing the City, but future increases should be annually reviewed and not automatic. This budget also includes a targeted tax increase on motor vehicle fuel and the personal property lease transaction tax, raising the vehicle fuel tax by $0.03 and the lease transaction tax on cloud-based products 1.75%. According the City’s Office of Budget and Management, the estimated impact from the property tax increase will be approximately $56.00, when using the example of a home worth $250,000. The increases to the personal property lease transaction tax and vehicle fuel tax are expected to generate $25 million in FY2021. The Mayor’s budget also proposes to eliminate 1,921 positions from the Corporate Fund by eliminating vacancies and shifting crossing guard costs onto the Chicago Public Schools budget as well as potential layoffs and furloughs. However, the City should move forward with requiring furlough days from both union and non-union workers, similar to actions taken by Cook County and Chicago Public Schools when they faced significant budgetary shortfalls. While the City’s labor partners have suggested reforms and efficiencies to help avert a property tax increase and layoffs, the Mayor’s administration has said many of the proposals have already been implemented. Therefore, the City should not wait until additional federal funding is received before rightsizing its workforce. The City’s Office of Budget and Management should also identify the budget savings in their budget that were proposed by the City’s labor partners that have already been implemented.

The members of the Chicago City Council have had to make difficult fiscal choices in recent years by approving a series of tax increases to address the severe underfunding of its four pension funds and put the City on better financial footing. However, much more remains to be done. In August 2020 the City projected corporate fund budget gaps of $1.5 billion in FY2022 and FY2023.[2] At the same time, it faces a growing debt burden and labor negotiations with the union representing the City’s rank-and-file police, accounting for over 50% of the corporate fund workforce, which are ongoing and may add additional fiscal stress. Furthermore, the firefighter and paramedic collective bargaining agreements that were approved earlier this year will expire on June 30, 2021.

While the City’s financial challenges continue to grow in size, the Civic Federation understands Mayor Lightfoot’s approach to addressing this year’s spending plan. It makes some important cuts and implements efficiencies and revenue increases, but tries also to focus on how to grow the economy on the other side of the pandemic. One of those investments is the decision to begin developing a citywide land use plan to help guide growth and development. The Federation is encouraged by the City’s efforts to develop a citywide plan, which has not been conducted in over 50 years. Additionally, the Federation is encouraged by Mayor Lightfoot’s initiatives to introduce best practices in risk management to help better control costs related to settlements and judgments and implement more thorough contract review processes that could produce significant savings.

The pace of recovery for Chicago will require cooperation among City officials, labor partners, residents and the State of Illinois to control the cost of government by enacting meaningful reforms and ensuring Chicago remains a strong economic engine for Illinois for years to come. Federal assistance to all governments should be a part of the recovery. However, given the lack of additional federal funding to date and the State of Illinois’ own precarious finances, the City should not delay in addressing its challenges head on. It should additionally prepare for potential downside risks such as the State of Illinois reducing local government assistance in order to balance its own budget or a renewed stay at home order to clamp down on a resurging spread of the coronavirus. The City should share these plans with aldermen and the public through regular briefings—potentially as part of implementing a recent City Council resolution calling for quarterly hearings and updates to aldermen on the budget.[3]

The Civic Federation offers the following key findings on Mayor Lightfoot’s proposed FY2021 budget:

• The projected net appropriations for FY2021 equal nearly $9.77 billion. This is a decrease of $74.0 million, or 0.8%, from FY2020 adopted net appropriations of just over $9.85 billion.
• The FY2021 Corporate Fund budget proposal will decrease by 9.0%, or $396.7 million, from approximately $4.4 billion in FY2020 to $4.0 billion in FY2021. The decrease is primarily due to the elimination and transfer of 1,921 positions and planned furlough days for non-union employees and potential layoffs;
• The FY2021 budget proposes to decrease staff by 2,089 FTEs or 5.9%, from 35,447 FTEs to 33,358 FTEs, not including grant-funded positions;
• Public Safety, which includes the Office of Public Safety Administration, Police Board, Police Department, Office of Emergency Management and Communication, Fire Department and Civilian Office of Police Accountability, will see the greatest decrease in FTEs, declining from 22,219 FTEs in FY2020 to 20,592 FTEs in FY2021, a decrease of 1,627 FTEs or 7.3%. This is due to the proposed reduction in vacant positions and the transferring of crossing guards from the City’s Office of Emergency Management and Communication to the Chicago Public Schools budget;
• Corporate Fund personnel services are projected to decrease by $99.1 million, or 3.2%, from $3.1 billion in the adopted FY2020 budget to $3.0 billion in FY2021;
• The City’s proposed FY2021 gross property tax levy is approximately $1.6 billion, which is a 5.9%, or $88.9 million, increase over the $1.5 billion levy adopted in the FY2020 budget;
• Between FY2010 and FY2019 total net direct debt rose by 11.4%, or $833.9 million. This represents an increase from $7.3 billion in FY2010 to nearly $8.2 billion ten years later;
• The total unfunded liabilities increased to $31.0 billion in FY2019 from $29.2 billion in FY2018; and
• Between FY2010 and FY2019, total unfunded liabilities per resident of Chicago grew from $5,473 per capita to $11,523 per capita. This is an increase of 110.6%.

The Civic Federation supports the following initiatives and elements of the City of Chicago’s proposed FY2021 budget:

• Reduction in personnel related expenses;
• Relative restraint with proposed increase in property tax levy;
• Implementing management efficiencies and reforms;
• Continuing to fund the Police and Fire Pension Funds on an actuarially calculated basis;
• Limited reliance on reserves to help close FY2021 Corporate Fund budget gap;
• Encouraging public participation by conducting a public survey and holding a series of virtual budget town hall meetings;
• Seeking reimbursement from Chicago Public Schools to cover a portion of the contribution to the Municipal Employees’ Annuity and Benefit Fund;
• Increasing targeted taxes for additional revenue; and
• Developing a citywide plan to help guide growth and development.

The Civic Federation has concerns about the following issues related to the City of Chicago’s proposed FY2021 budget:

• Reliance on upfront savings from scoop-and-toss debt transactions and a return to unsustainable past financial practices;
• Pension contribution spike in 2022 for Municipal and Laborers’ Funds;
• Ongoing structural imbalance;
• High bonded debt burden;
• Potential reduction in state shared revenues;
• Lack of cost of services data in budget;
• Uncertainty with regard to outcome of collective bargaining agreements that have not yet been ratified; and
• Planned reliance on gaming to fund police and fire pensions in future years.

The Civic Federation offers the following specific recommendations as a guide to improving the City of Chicago’s financial management:

• Seek budgetary savings through collective bargaining agreements currently under negotiation;
• Work with the Governor’s Pension Consolidation Task Force to explore the consolidation of Chicago’s public safety pension funds;
• Seek reasonable and sustainable collective bargaining agreement provisions;
• Develop a formal long-term financial plan for city operations and pension funds;
• Include finance general costs in city department budgets to show the full cost of services;
• Maximize transparency of the sales tax securitization corporation;
• Re-evaluate the use of TIF funds to address the City’s and overlapping governments’ financial challenges; and
• Increase the garbage collection fee to better ensure revenues are aligned with expenses associated with providing the service to residents.

Click here to read the full report.
Click here to read the press release for this analysis.